Pie-in-the-sky policies

Here at this blog we talk a lot about corrective regulation but rarely
stop to examine current government policy. In reality, most government
tax policy focuses either on revenue gathering or on discouraging
consumption of demerit goods. Infrequently, a corrective tax is
proposed – such as the ‘fart’ tax – and then discarded when it proves
unpalatable to the interest group generating the externality.

The fact is that corrective taxes are usually targeted at a
particular group and, the more precisely targeted they are, the more
efficient they are. These ‘discriminatory’ taxes are the ones least
likely to be implemented by a government wanting to appear fair and
even-handed: taxing specific groups is a sure way to generate
resentment at your policies.

So, if the taxes we want are equally as unlikely to eventuate as to be
magically fixed by ‘the market’, are we really any less removed from
reality than the blinkered free-marketeers that we scoff at?

  • Matt Nolan

    I agree that we focus on the normative, and forget about the positivist descriptions of our policies. But I think we improve on the free-market view by using their methodology to describe cases where government intervention is worthwhile.

    The normative approach we take is mearly the first step in analysing policy, I doubt that we could do anything of a higher level in a blog. By using the logic of partial equilibrium analysis we can describe hypothetical situations where govternment is useful. From there it would be appropriate to look at subjective critisims of the policy and do a cost-benefit analysis of its introduction. I don’t think there is anything wrong with starting on a clean slate, as long as you realise that the actual economies you’re dealing with already have policies in place.

  • Matt Nolan

    Also, even in situation where there is no policy (fart tax), just because interest groups have power in policy does not mean that discussing what would be optimal is wrong. After all we are discussing optimal government policy, not actual government policy.

    This exercise is useful as it teaches us how to view public policy, and how to combat interest groups that aren’t interested in social welfare. Without this sort of normative analysis, policy would be solely dictated by interest groups.

  • Matt Nolan

    My comments aren’t working properly dang it, I wrote a long winded one and it didn’t turn up.

    I was critisising my first comment on this post, where I said that we focus on the normative. I was thinking about it, normative stuff is the value judgements that we make, while positivist stuff is the underlying facts. I think we have a different idea on what the underlying premises are, as compared to free-marketeers. But I think our posts don’t make different value judgements than free-marketeers. As a result we focus on the positive part, but ignore normative considerations.

    Is that right? In the first comment I seem to be saying that we use the same facts, but use different value judgements to arrive at different conclusions. Now that I think about it that isn’t what we do. Do you have any ideas?

  • rauparaha

    I don’t think that free-marketeers see the situation differently from us. I don’t think they necessarily have different values. They just see an alternative to intervention for solving the problems of market failure. To them, market failure can be solved by other markets and government intervention is only likely to worsen the situation. I can see their point: if the history of government intervention shows it to be largely distortionary and not corrective then why favour it? In a way, promoting further intervention fails to acknowledge the reality of the situation.

    I hope that’s what my original post gets at: both interventionists and free-market types (to generalise horribly) have unrealistically idealistic notions, they’re just unrealistic about different things. I think the right way forward lies somewhere in-between. One needs to recognise that the second-best solution is theoretically attractive but often as politically unachievable as the first-best.

  • Matt Nolan

    I think your criticism attacks Dani Rodrik more than it attacks the way we have been writing here. I think he goes a bit far as well, and I agree that as long as we focus on logic and ignore history and subjectivity we will never come up with the right solution.

    I think we both see economics in the same way. Its a discipline where you have to learn some logical tools, but then when it comes to applying your knowledge to reality you have to take into account a wider range of factors, maybe even be a bit multi-disciplinary.

    Like I said before, I don’t think we are criticising free-marketeers on this blog, not in the way Dani Rodrik does. We are just trying to highlight ways in which government intervention could be useful, while supporting the notion that a market efficiently prices in a lot of things.

    Also free-marketeers must see something different to us if we have different conclusions. Like you said the difference is that we are feel government failure can be partially overcome, which is a normative, value-laden assumption. So the first comment was the right one, I get so confused.